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Cabinet bends rules, CEB to sign up for LNG power plant
Cabinet has bent the rules to let the Ceylon Electricity Board (CEB) sign up for a liquefied natural gas (LNG)/diesel-fired power plant despite the Attorney General (AG) warning that changes to draft project agreements made after bid closure will have “significant cost implications”.
The amendments also pose an “additional liability and risk” on the Government and the CEB, the AG says. And applicable legal principles do not permit changes to be made later to draft agreements on which basis bidders have already been evaluated and selected.
But a letter of intent is to be signed with Lakdhanavi Ltd for the 300mw combined-cycle dual fuel LNG power plant at Kerawalapitiya on a build, own, operate and transfer (BOOT) basis. Under the deal, Lakdhanavi will agree to a levelised tariff of Rs 14.989 per kilowatt hour (kWh) and to withdraw all pending court cases pertaining to the tender.
The tender process for the Kerawalapitiya project has dragged on since 2017. Mid-last year, Ravi Karunanayake, the then Power and Energy Minister, issued a letter of intent to GCL WindForce, a Sri Lanka-China joint venture. This will now be invalidated.
But the proposed contract with Lakdhanavi–the other party that made it to the final stages of the tender—is not without problems, according to Cabinet documents. The revised agreements were examined by both an expert committee and legal officers from the AG’s Department.
The AG wrote to the expert committee in July this year pointing out that over 75 clauses in the implementation and power purchase agreements have been amended pursuant to discussions between the developer Lakdhanavi and its lender. These were not highlighted when legal opinion was sought.
The request for proposals (RFP) the CEB has floated for this project had encouraged bidders to minimise deviations to the project agreements, cautioning that “proposals which contain material deviations to the draft project agreements may be rejected”.
“Material deviations” pertain to alteration of an instrument that materially changes it so that it no longer reflects the terms that the parties originally intended to serve as the basis of their legal obligation to each other.
Bidders could seek changes to documents only prior to bid closing. These may be accepted at the discretion of the Government, CEB or Ceylon Petroleum Corporation. Bidders must then submit their proposals based on the amended draft agreements.
In the case of Lakdhanavi, amendments were proposed, not only after bids were closed, but even after the final selection of the successful bidder. Thus, they are “not countenanced by law”, the AG’s legal team states. Careful scrutiny of the changes belied that “almost all the amendments have significant cost implications and provide for the imposition of additional liability and risks” on the Government and CEB.
The expert committee separately held that “several of these changes would lead to material changes in the project agreements”. It noted, among other things, that there was no provision in the RFP to accommodate material changes in the draft project documents. It subsequently sought legal advice from the AG’s Department.
The committee did recognise that some of Lakdhanavi’s concerns, particularly regarding the bankability—the willingness of established financial institutions to finance a project or proposal at a reasonable interest rate—of the project and allocation of risks in respect of force majeure are “acceptable in principle”. (Force majeure refers to unforeseeable circumstances that prevent someone from fulfilling a contract).
The committee recommended accommodating those concerns, a majority of which concerned the bankability of project documents, in future RFPs as it was “important to recognize the concerns of lenders in the current environment of uncertainty and volatility created by the COVID-19 pandemic and resulting financial crises facing many countries in the world”.
A senior CEB official said a lot of changes had been proposed and that “certain” of them were accepted. Some, however, were correction of defects and ambiguities in the original EFP which the CEB itself had floated. Others took into account the many conditions that had changed since the tender first closed in 2017—such as downgrades in Sri Lanka’s credit rating and the global pandemic.
“Without agreeing to certain conditions, the project wouldn’t have gone ahead,” the official said. “And some of those conditions were already in power purchase agreements the CEB had signed previously.”